EC 111 Test 3 questions

While cleaning your apartment, you look under the sofa cushion and find a $50 bill. You deposit the bill in your checking account. The fed's reserve requirement is 20% of deposits. What is the minimum amount that the money supply could increase?

$0 because, if your bank makes no loans from your deposit, currency falls by $50, deposits increase by $50, money supply does not change.

First Main Street Bank has an Excess reserve of $1,350,000 and a required reserve ratio of 25%. The First Main Street bank Loans out the $1,350,000 to Janet, who immediately uses the funds to write a check to Felix. Felix deposits the funds immediately into his checking account at second republic Bank. What increase in deposits did Second republic bank receive?

$1,350,000

The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Larry; a client of First Main Street bank. He deposits the money into his checking account at First Main Street bank. What is the Change in Excess Reserves?

$1,350,000

Carlos's assets include: A $10 bill A share in a publicly traded company The funds in a money market account and A boat. Which is the most liquid asset?

$10 bill

Suppose that Third Fidelity Bank currently has $100,000 in demand deposits and $65,000 in outstanding loans. the Federal Reserve has set the reserve requirement at 10%. What are the banks required reserves?

$10,000

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. The reserve requirement is 10%. How many dollars worth of government bonds do the Fed Reserve need to buy in order to increase the Money Supply by $200?

$20.00

Suppose that Third Fidelity Bank currently has $100,000 in demand deposits and has $65,000 in outstanding loans. the Federal Reserve has set the reserve requirement at 10%. What are the banks excess reserves?

$25,000

Suppose that Third Fidelity Bank currently has $100,000 in demand deposits and $65,000 in outstanding loans (excess). the Federal Reserve has set the reserve requirement at 10%. What are the banks reserves?

$35,000

Consider a simple economy that produces only cell phones. In 2014, the money supply was $320, the price of a cell phone was $8 and the economy produced 600 cell phones. What is the Nominal GDP?

$4,800

One good: Corn The economy has enough labor, capital and land to produce Y=800 bushels of corn. V is constant. in 2014, money supply was $2000 and the price was $5 a bushel of corn. Compute the normal GDP in 2014.

$4000

The economy has enough labor, capital and land to produce Y=800 bushels of corn. V is constant. in 2014, money supply was $2000 and the price was $5 a bushel of corn. For 2015, the Fed increases MS by 5%, to $2100. Compute the 2015 values of nominal GDP and P.

$4200 and $5.25

The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Larry; a client of First Main Street bank. He deposits the money into his checking account at First Main Street bank. What is the Change in Required reserve?

$450,000

You deposit $100 into your bank, There is a nominal interest rate of 5%. How much interest income will you have after 1 year?

$5

Assume a process continues, in which, each successive loan deposited into a checking account and no banks keep any excessive reserves. The original deposit was $1,800,000 and there is a required reserve ratio of 25%. Under these assumptions, the $1,800,000 injection into the money supply results how much of an overall increase in demand deposits?

$7,200,000

Inflation rate formula

(P2-P1)x100/P1

Relative price formula

(Price of good)/(price of another good)

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag of chips and one comic book. In year one, the Basket costs $9.00. In year two, the price of the same basket is $8.00. From year one to year two is there an inflation or deflation and at what rate?

-11.11%

What is the value of money with a price of 1.33?

.75

Lucia spends all of her money on magazines and beignets. In 2012, she earned $27 per hour, the price of a magazine was $9.99 and the price of a beignet was $3. Which of the following give the real value of a variable? 1. Lucia's wage is 9 beignets per hour in 2012. 2. Lucia's wage is $27.00 per hour in 2012. 3. The price of a magazine is $9 in 2012.

1. Lucia's wage is 9 beignets per hour in 2012.

What is the value of money with a price level of .8?

1.25

The price for a CD= $15 and a Price for a pizza is $10. What is the relative price of pizzas to Cd's

1.5

If the P for a bushel of corn is $2, what is the value of $1?

1/2 or .5

Formula to find the Value of $1

1/P

Inflation rate=8.5, Real Interest Rate= 4.5, Nominal interest Rate= 13, tax= 10%. What is the After tax nominal interest Rate?

11.7%

How many Federal reserve regional banks are there?

12

There is a nominal interest Rate of 11% and the inflation rate went from 6% to 5% after an increase in MS. What is the New Nominal Interest Rate?

12%

There is an inflation rate of 8.5% and a Real Interest Rate of 4.5%. What is the Nominal Interest Rate?

13%

Consider a simple economy that produces only cell phones. In 2014, the money supply was $320, the price of a cell phone was $8 and the economy produced 600 cell phones. What s the Velocity of Money?

15

Reserves= $150, Loans= $600, Securities= $750, Deposits= $1,200, Debt= $200, Capital=$100. What is the Leverage Ratio?

15.00

Reserves= $150, Loans= $600, Securities= $750, Deposits= $1,200, Debt= $200, Capital=$100. Suppose the owners of the bank borrow $100 to supplement their existing reserves. What is the new leverage ratio?

16.00

One good: Corn The economy has enough labor, capital and land to produce Y=800 bushels of corn. V is constant. in 2014, money supply was $2000 and the price was $5 a bushel of corn. Compute the Velocity in 2014

2

The economy has enough labor, capital and land to produce Y=800 bushels of corn. V is constant. in 2014, money supply was $2000 and the price was $5 a bushel of corn. For 2015, the FED increases MS by 5%, to $2100. suppose technological progress causes Y to increase to 824 in 2015. Compute 2014 to 2015 inflation rate.

2%

Lucia spends all of her money on magazines and beignets. In 2012, she earned $27 per hour, the price of a magazine was $9.99 and the price of a beignet was $3. Which of the following give the nominal value of a variable? 1. Lucia's wage is 3 magazines per hour in 2012. 2. Lucia's wage is $27.00 per hour in 2012. 3. The price of a beignet is .33 magazines in 2012.

2. Lucia's wage is $27,00 per hour in 2012.

What is the leverage ratio if the reserves=$200, loans=$700, securities=$100, Deposits=$800, Debt=$150, and Capital=$50?

20. For every $20 in assets, $1 is from the banks owners and $19 is financed with borrowed money.

In 2016, a burrito is $4.00. How many burritos can be bought with $900?

225 burritos

Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Lucia's wage has risen to $54.00 per hour. The price of a magazine is $18.00 and the price of a beignet is $6.00. What is the relative price of a magazine?

3 beignets

The nominal Wage= $15/hour and the price level is $5/unit of output. What is the real wage?

3 units of output per hour.

Inflation rate=8.5, Real Interest Rate= 4.5, Nominal interest Rate= 13, tax= 10%., After-tax Nominal interest Rate. What is the after tax Real interest Rate?

3.2%

Inflation Rate= 2%, Real interest Rate= 4.5%, Nominal interest Rate= 6.5%, Tax of 10%. After tax nominal interest Rate= 5.85%. What is the After tax Real interest Rate?

3.85%

In 2014, The price of a cell phone was $8.00. In 2015, The price of a cell phone was $8.40. What is the percent change in P? (Inflation)

5%

In 2014, the money supply was $320.In 2015, The money supply was $336. What is the Percent change in the quantity of Money? (inflation)

5%

The economy has enough labor, capital and land to produce Y=800 bushels of corn. V is constant. in 2014, money supply was $2000 and the price was $5 a bushel of corn. For 2015, the FED increases MS by 5%, to $2100. Compute the inflation rate for 2014 to 2015.

5%

Inflation Rate= 2%, Real interest Rate= 4.5%, Nominal interest Rate= 6.5%, Tax of 10%. What is the After tax Nominal interest Rate?

5.85%

There is an Inflation rate of 2% and a real interest rate of 4.5%. What is the nominal interest Rate?

6.5%

Leverage Ratio Formula

= (Reserves+Loans+ Securities)/ capital

After tax real interest Rate=

= After tax nominal interest Rate- Inflation rate

Actual Real interest Rate=

= Nominal interest Rate- Actual inflation rate

Expected Real interest Rate=

= Nominal interest rate- expected inflation rate.

New Nominal Interest Rate formula

= Old nominal interest rate + Change in the inflation Rate

After tax nominal interest rate=

= nominal interest rate- (Tax X nom. interest rate)

In the money multiplier, if rate = 10%, what does the money multiplier create? and how much does it create with $100?

=10 It creates $1000

Nominal interest Rate formula

=Real interest Rate + inflation

Darnell has a roll of quarters that he just withdrew from the bank to do laundry. Is this an example of M1 or M2?

Both M1 and M2.

Reserves= $150, Loans= $600, Securities= $750, Deposits= $1,200, Debt= $200, Capital=$100. Suppose the owners of the bank borrow $100 to supplement their existing reserves. How does this effect the Bank's balance sheet?

Both Reserves and Debt increase by $100.

Suppose the nominal interest rate on savings account is 11% per year, and both actual and expected inflation are equal to 5%, before an increase in MS. What is the Expected real interest rate and what is the Actual real Interest rate?

Both are 6%

In prisons in America, the prisoners use cigarettes as a medium of exchange. What type of money is the cigarette?

Commodity money

Change in Demand Deposits formula

Demand Deposits= initial deposit x 1/r

Excess reserves formula

Excess reserves= Reserves- Required reserves

Suppose the nominal interest rate on savings account is 11% per year, the Expected inflation rate is 5% and the Actual inflation rate is 6% immediately after an increase in MS. What are the Expected Real interest rate and the Actual Real interest Rate?

Expected real interest Rate= 6% Actual Real interest Rate= 5%

In the United States, The government has its citizens using a U.S. dollar bill as its for of medium of exchange. What type of money is the U.S. dollar bill?

Fiat money

Carlos's assets include: A $10 bill A share in a publicly traded company The funds in a money market account and A boat. Which is the second most liquid asset?

Funds in a money market account

You deposit $1000 in the bank for 1 year. case 1: Inflation=0%, nominal interest rate = 10% Case 2: inflation=10%, nominal interest rate= 20% In which case does the real value of your deposit grow the most?

In both cases, The real interest rate is 10%, so the real value of the deposits grow 10% (before taxes).

You deposit $1000 in the bank for 1 year. case 1: Inflation=0%, nominal interest rate = 10% Case 2: inflation=10%, nominal interest rate= 20% Assume the tax rate is 25% In which case do you pay the most taxes?

In case 1: Interest income= $100 so you pay $25 in taxes. In case 2: interest income= $200, so you pay $50 in taxes.

Jacques has $2000 in a savings account. Is this an example of M1 or M2?

M2

Kyoko has $6000 in a six month certificate of deposit (CD). is this an example of M1 or M2?

M2

Money Multiplier Formula

Money Multiplier= 1/R

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. Suppose the banking system has total reserves of $500. The reserve requirement is 10%. What is the money multiplier and the Money supply?

Money Multiplier= 10 Money Supply= $5,000

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. Suppose the banking system has total reserves of $500. The reserve requirement is 25%. What is the money multiplier and the Money supply?

Money Multiplier= 4 Money supply= $2,000

Money supply formula

Money Supply= Money Multiplier X Total reserves

Quantity equation

MxV=PxY

You deposit $1000 in the bank for 1 year. case 1: Inflation=0%, nominal interest rate = 10% Case 2: inflation=10%, nominal interest rate= 20% Assume the tax rate is 25%. Compute the after tax nominal interest rate, then subtract inflation to get the after-tax real interest rate for Case A.

Nominal = 7.5% Real= 7.5%

Nominal GDP formula

Nominal GDP= PxY

You deposit $1000 in the bank for 1 year. case 1: Inflation=0%, nominal interest rate = 10% Case 2: inflation=10%, nominal interest rate= 20% Assume the tax rate is 25%. Compute the after tax nominal interest rate, then subtract inflation to get the after-tax real interest rate for Case B.

Nominal= 15% Real= 5%

In 2017, The government prints more money to meet its debt obligations. As a result, The money supply rises by 20% by 2017. The original price of a burrito is $4.00. What happens to the price of a burrito and how many burritos can be bought with $900 in 2017?

Price= $4.80 Quantity= 187

In 2015, The money supply was $336, The velocity of money was 15, The economy produced 600 cell phones. What is the Price in 2015? What is the Nominal GDP?

Price= $8.40 Nominal GDP= $5040

Nominal interest rate=

Real interest rate + inflation rate

First Main Street Bank has an Excess reserve of $1,350,000 and a required reserve ratio of 25%. The First Main Street bank Loans out the $1,350,000 to Janet, who immediately uses the funds to write a check to Felix. Felix deposits the funds immediately into his checking account at second republic Bank. What is the required reserve and what is the excess reserves (increase in loans)?

Required reserves= $337,500 Excess reserves= $1,012,500

The Second Republic Bank has $1,012,500 in Loanable funds (Excess reserves) and a 25% required reserve ratio. The bank lends out all of the new excess reserves to Raphael, who writes a check to Megan, who deposits the money into her account at Third Fidelity Bank. What is the Required reserves and what is the excess reserves?

Required reserves=$253,125 Excess reserves= $759,375

Reserves formula

Reserves= Demand deposits - Loans

Carlos's assets include: A $10 bill A share in a publicly traded company The funds in a money market account and A boat. Which is the third most liquid asset?

Share of stock

Dmitri manages a grocery store in a country experiencing a high rate of inflation. He is paid in cash twice per month. On payday, he immediately goes out and buys all the goods he will need over the next two weeks in order to prevent the money in his wallet from losing value. What he can't spend, he converts into a more stable foreign currency for a steep fee. What example of inflation is this?

Shoe-leather costs.

Carlos has $1537 in his checking account. is this an example of Medium of exchange, Unit of account, or Store of value?

Store of value

Suppose First Main Street Bank, Second Republic Bank, and third Fidelity Bank all have Zero excess reserves. The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Larry; a client of First Main Street bank. He deposits the money into his checking account at First Main Street bank. Reflect any Liability changes in First Main Street Bank;s T- account (Before the bank makes any new loans).

The $1,800,000 is recorded as a demand deposit, because Larry could demand his deposit back at any time by coming into the bank and asking for it, by writing a check, or by using a debit card.

Carlos's assets include: A $10 bill A share in a publicly traded company The funds in a money market account and A boat. Which is the least liquid asset?

The boat

Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Lucia's wage has risen to $54.00 per hour. The price of a magazine is $18.00 and the price of a beignet is $6.00. What is the effect of nominal value and real value of Lucia's wage between 2012 and 2017?

The nominal value increases while her real value remains the same.

The banks begin holding some excess reserves due to uncertain economic. Banks increase the percentage of deposits held as reserves from 10% to 25%. The money Multiplier is now 4. Under these conditions how much money worth of U.S. bonds does the Fed need to buy in order to increase the money supply by $200?

They would need to buy $50.00

Carlos can easily determine that the price of the computer is more than the price of the vacation. Is this an example of Medium of exchange, Unit of account, or Store of Value?

Unit of account

Velocity of money Formula

V= (PxY)/M

Pizza in 2015. Y= real GDP=3000 pizzas P=price level=$10 M=money supply= $10,000 What is the Velocity of money?

V= 3

Real wage formula

W/P

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag of chips and one comic book. In year one, the Basket costs $9.00. In year two, the price of the same basket is $8.00. In each year, how many baskets can you buy wth $72.00?

Year one= 8 baskets Year two= 9 Baskets

Carlos writes a check for $1,299. Is this an example of Medium of exchange, Unit of account, or Store of value?

medium of exchange

Required reserves formula

required reserves= Demand deposits X Required Reserve Ratio.

Suppose First Main Street Bank, Second Republic Bank, and third Fidelity Bank all have Zero excess reserves. The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Larry; a client of First Main Street bank. He deposits the money into his checking account at First Main Street bank. Reflect any Asset changes in First Main Street Bank;s T- account (Before the bank makes any new loans).

the $1,800,000 increases the bank's reserve because the bank can use some of these reserves to make loans to other people.

The banks begin holding some excess reserves due to uncertain economic. Banks increase the percentage of deposits held as reserves from 10% to 25%. What does this increase in the reserve ratio cause to happen to the money multiplier?

to fall to 4.